JPMorgan Says Sterling Slide Has Another Benefit for U.K. StocksBy
British exporters gain as goods cost less in other currencies
FTSE 100 members make about three-quarters of revenue abroad
There is an argument for U.K. stocks linked to the pound that goes beyond just the translation boost to exporters’ earnings from sterling’s weakness.
British companies can also gain market share abroad by increasing sales, as their products cost less in other currencies, according to JPMorgan Asset Management. Though that tailwind is more difficult to quantify than the mechanical earnings uplift from a favorable exchange rate, it’s starting to kick in and to make U.K. stocks more attractive, according to James Illsley, a London-based fund manager at the firm.
“Analysts can easily calculate a company’s profits are worth more in sterling terms, but now we are starting to see that companies may be able to sell more overseas,” Illsley, who helps manage 900 million pounds ($1.2 billion) of U.K. equities, said by phone. “We are starting to see that second-round effect from the sterling weakness now.”
The pound posted a fourth straight monthly decline versus the euro in August, the same month that saw its steepest drop versus the U.S. dollar since October. The outlook for September may not be much better amid stalled Brexit negotiations and an economy that’s failed to recharge after a sharp slowdown in the first half.
That’s good news for many U.K. stocks: FTSE 100 Index members get about three-quarters of their revenues abroad, while for the FTSE 250 that number stands at about 50 percent.
One such stock that Illsley owns is Spirax-Sarco Engineering Plc, which gets more than 90 percent of revenue outside the U.K. and whose shares are up 34 percent this year. The Cheltenham, England-based industiral company last month posted half-year sales that rose 25 percent from 2016, noting that currency movements contributed more than 10 percent percentage points of that growth.
Shares of Renishaw Plc, which lists Europe and the U.S. among its biggest revenue sources by geography, are up 85 percent in 2017 and trading at a record. The supplier of precision measuring and calibration equipment posted results in July that exceeded estimates, with analysts saying sales and profit growth reflect a growing export advantage.
British firms need to avoid damaging profit margins by using the pound’s weakness to cut prices in a race for market share, said Dennis Jose, equity strategist at Barclays Plc.
“I’m not entirely sure it’s the best thing for companies to do, especially because in this cycle, profitability has been an important driver of stock valuations,” Jose said by phone.
Analysts expect members of the FTSE 100 to increase profit by about 35 percent on average this year, versus 12 percent for the Euro Stoxx 50, according to data compiled by Bloomberg. Illustrating how the common currency is weighing on the euro region’s exporters, the spread between the FTSE All-Share Index and Euro Stoxx 50 Index hit the highest since February last week.
“With the euro’s rise, U.K. companies’ competitive advantage in the euro zone continues to increase,” Illsley said, adding that Brexit presents a possible challenge.